The latest OPEC standoff that is keeping oil prices at lofty levels opens the door for investors to potentially profit from several oil-related stocks, according to Goldman Sachs energy analyst Neil Mehta.
Mehta outlined 10 oil stocks he is bullish on in a new piece of research on Tuesday: (1) Occidental Petroleum (OCY); (2) ExxonMobil (XOM); (3) Ovintiv (OVV); (4) Diamondback Energy (FANG); (5) ConocoPhillips (COP); (6) EQT Corporation (EQT); (7) Pioneer Natural Resources (PXD); (8) Devon Energy (DVN); (9) Hess (HES); and (10) Schlumberger (SLB).
The analyst puts the 10 stocks into a few key investment themes:
Turnaround stories: OCY; XOM; OVV
M&A winners: FANG; COP; EQT; PXD; DVN
Company-specific stories: HES; SLB
“We project Brent will sustain $75-$80/b over the next 18 months in our financial models, enabling deleveraging and improved returns,” Mehta says of his underlying thesis on the aforementioned oil names.
Gains in the oil patch in recent months have been fueled by indications of strong demand amid economic rebounds meeting low levels of supply. The Energy Information Administration (EIA) reported that U.S. crude oil inventories fell by 6.7 million barrels for the week ended June 25.
More recently, oil prices have caught a bid from the tense standoff inside of OPEC. The UAE, Russia and Saudi Arabia continue to disagree on production increases.
“As negotiations continue, we estimate that most outcomes (1) still imply higher prices in coming months as the physical market tightens, (2) with higher OPEC production than the group discussed needed by the global oil market next year. Price volatility will likely rise, with the release of the August OSP the key next catalyst,” Mehta’s colleague Damien Courvalin wrote today in a separate research note.
OPEC’s problems are likely to be just added fuel to oil prices (and oil stocks) in coming months.
Bank of America commodities strategist Francisco Blanch said last week he sees a case for $100 a barrel oil next year.
“First, there is plenty of pent up mobility demand after an 18 month lockdown. Second, mass transit will lag, boosting private car usage for a prolonged period of time. Third, pre-pandemic studies show more remote work could result in more miles driven, as work-from-home turns into work-from-car. On the supply side, we expect government policy pressure in the U.S. and around the world to curb CapEx over coming quarters to meet Paris goals. Secondly, investors have become more vocal against energy sector spending for both financial and ESG reasons. Third, judicial pressures are rising to limit carbon dioxide emissions. In short, demand is poised to bounce back and supply may not fully keep up, placing OPEC in control of the oil market in 2022,” explained Blanch.
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